Location: New York
Author: Kevin Duignan
Date: Wednesday, March 4, 2009
Borrower defaults in U.S credit card and auto loan ABS transactions will continue to increase in the coming months as the unemployment rate accelerates at levels not seen since the 1973 recession, says Fitch Ratings.
'With the unemployment rate expected to continue to rise at its current rapid pace, there does not appear to be any respite for consumer defaults on the horizon,' said Managing Director and U.S. ABS group head Kevin Duignan. 'Unemployment remains the predominant indicator in determining the likelihood of borrower default in credit card and auto loan ABS.'
The acceleration in the unemployment rate implies that the recent record chargeoff levels in credit card transactions and gross losses in auto loan transactions will easily be surpassed in the coming months.
Despite the elevated expected peak loss levels, auto and credit card ABS transactions have experienced limited negative rating actions. Auto loan transactions have benefited from seasoning and structures that have been able to build credit enhancement despite the higher losses. Credit card transactions have also benefited from robust structures as well as actions by the issuer to actively re-price risk through rate increases and line decreases. More recently, a number of credit card issuers have added enhancement to their trusts to bolster credit enhancement and limit potential negative rating actions.
'The 37% average annual increase in the unemployment rate over the past seven months was followed by a 37% and 45% increase in credit card charge-offs and auto cumulative net losses, respectively,' said Managing Director Mike Dean. 'Assuming unemployment increases by another 20%, rising to 9%, we would expect a 20% increase in credit card charge-offs and a 24% increase in auto cumulative net losses.'
Fitch's analysis confirms that spikes in the unemployment rate over the past 12 months were followed by comparable loss increases in credit card and auto loan securitizations within one to two months. This linkage, originally discussed in Fitch's June 2008 special report titled 'Will Consumer ABS Crack Under Unemployment Pressure?', has been validated using data through February 2009. An updated version of the report will be released in the next few weeks.
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